Red Robin Will Halt Restaurant Growth After 2018

Red Robin will hit pause on its growth come 2018, halting future openings and turning its focus inward for 18–24 months, CEO Denny Marie Post said late Monday afternoon. Along with disappointing metrics that underwhelmed Wall Street, the news sent shares of the casual dining brand plummeting after hours. Shares fell nearly 24 percent when the market closed Monday, and were down another 20 percent in pre-market trading Tuesday morning. Red Robin’s stock sat $53.35 heading into the workday—a significant drop from $67.06 at 4 p.m. the afternoon before.

Following a positive second quarter, where Guy Constant, executive vice president and chief finance officer, said the brand outperformed its own expectations, Red Robin admitted this past quarter “didn’t go as well as we hoped, clearly.” Also, part of the disappointment can be credited to Red Robin raising its own bar on performance, not necessarily on the numbers themselves, he said.

The brand reported third-quarter net income of $2.7 million versus a net loss of $1.3 million in the same period last year. Total revenues were $304.2 million, an increase of 2.3 percent, year-over-year, and same-store sales declined 0.1 percent. Adjusted earnings per diluted share were 21 cents. Zacks Investment Research predicted earnings per share of 27 cents and revenue of $308.1 million. Shares had climbed 18 percent since the beginning of the year and were up 41 percent over the last 12 months heading into Monday.

But the pullback Tuesday pinned some investor optimism. As for the growth strategy, Post said the company needed to “reconsider what has traditionally worked in the past.” Red Robin will open nine corporate stores in 2018 but then stop for “18 to 24 months to sort out what models best meet the needs of our changing guest base, allow us to profitably broaden our reach to more guests, all the while reducing construction and labor costs.”

During the third quarter, Red Robin opened seven restaurants and said it plans to open two more in 2017. That would give the chain 567 units. Adding 2018, Red Robin will try to stay steady at 576 restaurants (86 of which are franchised) as the brand strengthens its core.

“We know that just maximizing what we have, while very critical, is not sufficient to achieve the growth we all seek. We must rapidly pilot transformational changes, which will alter our existing model, while also conceptualizing revolutionary new approaches for the future,” Post said.

Like chains around the country, hurricanes Harvey and Irma hurt Red Robin’s report. Post said without the storms’ impact, the brand would have finished up 30 basis points. Yet, even with the hit, she said Red Robin was 400 basis points above casual dining as a whole when it comes to traffic, marking the company’s fifth straight quarter of doing so. For the quarter, Red Robin’s guest traffic was flat. There was a 0.1 percent decrease in average guest check.

Post said Red Robin also outpaced the industry on sales by 230 basis points. She attributed the performance to two factors: value and the expansion of the brand’s Tavern menu—with three options at $6.99—to nine items.

The next factor was off-premises dining, which Post said ended the quarter at 7.6 percent of total food and beverage sales compared to 5.4 percent this time last year.

Carin Stutz, chief operating officer and executive vice president, said Red Robin’s rollout of online ordering at company restaurants is nearly complete, and 98 percent of stores have call-center support. Curbside delivery is also currently available in more than 50 percent of locations and Red Robin sees that maxing out into the low 60s “due to lease restrictions” in the near future.

At the end of the quarter, third-party delivery was live in close to 50 percent of Red Robins, with anywhere from one to three providers. Meanwhile, the company is looking at ways to cut out that extra cost of engaging a partner.

“We have commented on the fact that this is not the most profitable way to get food to our guests when and where they want it, but it is providing additional visibility to our guests that they can get Red Robin to go,” Stutz said. “Third-party sales have almost doubled this quarter, counting for about 110 basis points of the 7.6 percent in off-premise sales. While we like the visibility, we are piloting self-delivery and will learn about it as quickly as we can.”

Red Robin launched its first venture into a catering platform with Red Robin Gourmet Burger Bar, which is only available for pickup at this time. “The Burger Bar has opened us up to participate in what would traditionally be a group gathering at a guest home or office. And while we're just getting started, it's great to have the ability to deliver a large off-premise order,” Stutz said.

A leading initiative in recent quarters for Red Robin has been its attempt to manage labor cost. The brand’s “strongest and largest” footprint is on the West Coast, where minimum wage and the industry’s general regulatory environment is growing at an unprecedented rate, Stutz said. Hourly wages climbed in the mid-single digits in 2017 and Red Robin knows “there's no appetite by today's consumer to spend more to cover this. Absorbing these increases with higher pricing is not an alternative for us,” Stutz said.

In response, Red Robin completed a rollout of a Maestro service model it says will boost efficiencies and result in a 5 percent drop in labor hours used in the fourth quarter versus the previous year.

“As an industry, we are facing, clearly, some very challenging forces. Minimum wage increases already on the books in some of our most penetrated states are, frankly, staggering,” Post said. “Guest demand is shifting to off-premise, particularly via home delivery, more rapidly than any of us might have anticipated. This option blends guests' dining choices between quick service, fast casual, and full-service restaurants, independent and chain, like never before, without consideration for convenience of location or that perfect corner. We are addressing these forces with creativity and urgency.”

Red Robin said it is expecting same-store sales to grow positive from flat to 0.5 percent for full-year 2017.

“We simply can't be satisfied with this level of financial performance despite the outstanding efforts of our team members and the incredible loyalty of our guests. The future will look much different than it does today, and frankly, it needs to,” Constant said.

Post said Red Robin is optimistic thanks to its DNA, which she believes lifts the concept above the casual-dining pack. These differentiating factors, which “are deeply embedded” in Red Robin’s business model, translate across all access modes, human or virtual, Post said.

“Our guests tell us three things matter most. No. 1, we stand for something, craveable, customizable, gourmet burgers and amazing fries. Guests know to come to us for the best. Second, we have a well-earned, and now bolstered reputation for attentive service at appropriate speed, which meets the needs of multi-generational guests from two to 92. By the way, this includes, and always has, millennials. They love us. And three, we have best-in-class value perceptions. We will continue to put affordable abundance first to be our bottomless promise and reasonable prices, with burgers starting at $6.99 available every day and to every day part, not just occasionally,” she said.

“We can and will leverage all of these and build on them as we drive innovative new service options and incremental revenue through investments in guest-facing technology, improved equipment, and even novel partnerships as needed.”